As explained by Hartford Funds, roboadvisers are a growing advice segment that leverages technology platforms to deliver investment advice and portfolio management based on an individual’s financial circumstances. The platforms function by collecting key points of data about an individual’s existing wealth, asset allocation, age and salary—which are then plugged into an algorithm that develops a model portfolio and takes care of regular rebalancing and other account maintenance.
A survey from Hartford Funds finds the typical American is in the dark when it comes to roboadviser platforms, with only 11% of those polled having heard the term “roboadviser” before. Even after a detailed explanation of digitally based advice providers, 74% of Americans believe a personal relationship with a financial adviser remains the most appropriate resource for their investment needs, according to Hartford Funds.
The findings are from a sample of more than 1,000 consumers and 100 practicing financial advisers. Despite the preference for in-person advisers over digital platforms, the survey results suggest about six in 10 (59%) Americans have never worked with a financial adviser, traditional or robotic. This includes 30% of Americans with a household income exceeding $125,000.
John Diehl, senior vice president at Hartford Funds, tells PLANADVISER he was not surprised by the lack of awareness around roboadviser platforms, either among consumers or practicing advisers. He suggests many advisers don’t actually think of “roboadvisers” as a separate or distinct advisory channel that will directly compete with “traditional” advisers.
“I am out in the field all year working with advisers that serve a variety of client types,” Diehl explains. “The overwhelming sense I get is that they don’t see a hard and fast distinction between traditional advisers and roboadvisers. Most see the portfolio management and rebalancing services as just a piece of their value proposition, so they don’t think they will be replaced by roboadvisers. And I think that’s right. There is more to an advisory relationship than the portfolio maintenance.”
Diehl points to a piece of survey data to back up the claim, showing 45% of Americans report they are not comfortable using online platforms to save, invest or manage their finances. This compares with 53% who indicate some level of comfort, Diehl notes. Importantly, technology use for financial purposes tends to be more prominent among younger Americans, the research finds, as 68% of Millennials indicated comfort using these platforms, compared with only 30% of current retirees.
“The trend lines clearly show these types of programs will become more popular in the future and as Millennials come into their own as a class of investors,” Diehl says. “But will roboadvisers take over in the next few years or push traditional or higher-touch advice offerings out of the market? Personally, I doubt that.”
On the provider side of the equation awareness is somewhat better, Diehl notes, but still lagging. Only half (50%) of advisers indicate familiarity with the term “roboadviser.” Most advisers (94%) who are familiar with the topic say they have already identified ways they could enhance their business through introduction of a digital advice platform. And even 54% of advisers who identified as being unfamiliar with the term “roboadviser” have considered the potential benefits of adding similar digital elements to their practice.
Thirty-eight percent of advisers familiar with the topic felt that roboadviser platforms could most enhance their business by allowing for different service models based off of a client's individual level of needs. As Diehl explains, this group may be thinking about establishing a digital advice platform that will serve one group of clients—say, those with lower balances who feel they don’t have the assets to make a traditional advisory relationship worthwhile—while also maintaining other advice delivery options.
“For example, they could maintain their traditional, face-to-face advisory services for higher-balance clients who want to pay a little more for the direct interaction with the adviser, in person,” he says. Indeed, a significant number of advisers polled felt roboadviser platforms could help their practice by attracting new clients with lower account minimums (26%), or by attracting clients in younger generations (24%).
“The issue many consumers face in approaching roboadvisers is that they don’t have clearly defined goals and objectives,” Diehl notes. “As a result, they are still inclined to rely on a real person for financial guidance. This is where the convergence of traditional advisory services and technology can be very powerful.”
According to Diehl, advisers are slowly but surely learning that technology can create significant scale and efficiency opportunities in advice delivery, so long as clients have a clear picture of what they want to accomplish. “However, establishing that clarity still seems to be primarily a human interaction, as opposed to a technological exchange of information,” he says.
Given the relative lack of awareness of roboadvisers among consumers, robo-knowledge can be a key differentiator for advisers, Diehl continues.
“This can arm them with the insights necessary to further educate existing clients while engaging the next generation of prospects,” Diehl says. “Millennials in particular present an interesting opportunity as they realize the value of a human adviser, but are also the most tech savvy. Advisers who engage with them early on will be able to benefit the most as their personal finance needs become more sophisticated.”
The survey of over 1,000 consumers and 100 advisers was executed both in-person and via phone during the month of November 2014.
More information on Hartford Funds research and services is available here.